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Question 1 of 20
1. Question
A manufacturer has high fixed factory rent and low variable cost per unit. If demand rises substantially within existing capacity, operating profit may rise rapidly because:
Correct
With high fixed costs, additional contribution can flow strongly into EBIT once fixed costs are covered. This is the operating leverage effect, assuming price and unit variable costs remain stable.
Incorrect
With high fixed costs, additional contribution can flow strongly into EBIT once fixed costs are covered. This is the operating leverage effect, assuming price and unit variable costs remain stable.
Unattempted
With high fixed costs, additional contribution can flow strongly into EBIT once fixed costs are covered. This is the operating leverage effect, assuming price and unit variable costs remain stable.
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Question 2 of 20
2. Question
Contribution is ₹18 lakh and EBIT is ₹6 lakh. The degree of operating leverage is:
Correct
DOL = contribution ÷ EBIT = ₹18 lakh ÷ ₹6 lakh = 3.
Incorrect
DOL = contribution ÷ EBIT = ₹18 lakh ÷ ₹6 lakh = 3.
Unattempted
DOL = contribution ÷ EBIT = ₹18 lakh ÷ ₹6 lakh = 3.
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Question 3 of 20
3. Question
EBIT is ₹24 lakh and interest is ₹8 lakh. The degree of financial leverage, ignoring preference dividends, is:
Correct
DFL = EBIT ÷ (EBIT − interest) = 24 ÷ 16 = 1.5. Therefore the correct option is 1.5.
Incorrect
DFL = EBIT ÷ (EBIT − interest) = 24 ÷ 16 = 1.5. Therefore the correct option is 1.5.
Unattempted
DFL = EBIT ÷ (EBIT − interest) = 24 ÷ 16 = 1.5. Therefore the correct option is 1.5.
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Question 4 of 20
4. Question
A combined leverage of 3.5 means that, near the analysed activity level and under the model assumptions:
Correct
Combined leverage measures the approximate sensitivity of earnings per share to sales. A value of 3.5 suggests a 1% sales change may produce about a 3.5% EPS change, in the same direction, locally.
Incorrect
Combined leverage measures the approximate sensitivity of earnings per share to sales. A value of 3.5 suggests a 1% sales change may produce about a 3.5% EPS change, in the same direction, locally.
Unattempted
Combined leverage measures the approximate sensitivity of earnings per share to sales. A value of 3.5 suggests a 1% sales change may produce about a 3.5% EPS change, in the same direction, locally.
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Question 5 of 20
5. Question
Two firms have identical sales and variable cost ratios, but Firm X has higher fixed operating costs. Firm X will generally have:
Correct
Higher fixed operating costs raise the sales needed to cover costs and generally increase operating leverage, all else equal.
Incorrect
Higher fixed operating costs raise the sales needed to cover costs and generally increase operating leverage, all else equal.
Unattempted
Higher fixed operating costs raise the sales needed to cover costs and generally increase operating leverage, all else equal.
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Question 6 of 20
6. Question
A company with volatile EBIT and weak interest coverage is considering additional debt. The strongest concern is:
Correct
Volatile EBIT and weak interest coverage make fixed interest commitments more dangerous. Additional borrowing may increase financial distress even if it could improve EPS in favourable conditions.
Incorrect
Volatile EBIT and weak interest coverage make fixed interest commitments more dangerous. Additional borrowing may increase financial distress even if it could improve EPS in favourable conditions.
Unattempted
Volatile EBIT and weak interest coverage make fixed interest commitments more dangerous. Additional borrowing may increase financial distress even if it could improve EPS in favourable conditions.
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Question 7 of 20
7. Question
If two financing plans produce equal EPS at a particular EBIT, that EBIT is called:
Correct
The EBIT-EPS indifference point is the operating income at which alternative financing plans produce the same EPS. It is useful for comparing capital structures under specified assumptions.
Incorrect
The EBIT-EPS indifference point is the operating income at which alternative financing plans produce the same EPS. It is useful for comparing capital structures under specified assumptions.
Unattempted
The EBIT-EPS indifference point is the operating income at which alternative financing plans produce the same EPS. It is useful for comparing capital structures under specified assumptions.
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Question 8 of 20
8. Question
Fixed costs are ₹12 lakh and contribution margin ratio is 25%. Break-even sales are:
Correct
Break-even sales = fixed costs ÷ contribution margin ratio = ₹12 lakh ÷ 0.25 = ₹48 lakh.
Incorrect
Break-even sales = fixed costs ÷ contribution margin ratio = ₹12 lakh ÷ 0.25 = ₹48 lakh.
Unattempted
Break-even sales = fixed costs ÷ contribution margin ratio = ₹12 lakh ÷ 0.25 = ₹48 lakh.
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Question 9 of 20
9. Question
Fixed costs are ₹5 lakh, target profit ₹3 lakh and contribution margin ratio 40%. Required sales are:
Correct
Required sales = (fixed costs + target profit) ÷ contribution margin ratio = ₹8 lakh ÷ 0.40 = ₹20 lakh.
Incorrect
Required sales = (fixed costs + target profit) ÷ contribution margin ratio = ₹8 lakh ÷ 0.40 = ₹20 lakh.
Unattempted
Required sales = (fixed costs + target profit) ÷ contribution margin ratio = ₹8 lakh ÷ 0.40 = ₹20 lakh.
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Question 10 of 20
10. Question
A company shifts sales toward a product with a lower contribution margin while total sales remain constant. In general, this will:
Correct
The sales mix determines weighted average contribution. A shift toward lower-contribution products reduces contribution at a given sales level and can lower profit or increase break-even sales.
Incorrect
The sales mix determines weighted average contribution. A shift toward lower-contribution products reduces contribution at a given sales level and can lower profit or increase break-even sales.
Unattempted
The sales mix determines weighted average contribution. A shift toward lower-contribution products reduces contribution at a given sales level and can lower profit or increase break-even sales.
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Question 11 of 20
11. Question
A supplier quotes ₹74 per component. Making costs ₹80, including ₹12 of fixed overhead that will continue regardless. The relevant make cost is ₹68. What is the cost-minimising choice, ignoring qualitative factors?
Correct
Relevant make cost = ₹80 − ₹12 unavoidable fixed overhead = ₹68. This is lower than the supplier’s ₹74 price, so making is cheaper before considering opportunity costs and qualitative factors.
Incorrect
Relevant make cost = ₹80 − ₹12 unavoidable fixed overhead = ₹68. This is lower than the supplier’s ₹74 price, so making is cheaper before considering opportunity costs and qualitative factors.
Unattempted
Relevant make cost = ₹80 − ₹12 unavoidable fixed overhead = ₹68. This is lower than the supplier’s ₹74 price, so making is cheaper before considering opportunity costs and qualitative factors.
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Question 12 of 20
12. Question
A special order would displace regular sales that generate contribution of ₹1.5 lakh. The order itself generates incremental contribution of ₹2 lakh before displacement. Net benefit is:
Correct
Net incremental benefit = contribution from special order − foregone contribution = ₹2 lakh − ₹1.5 lakh = ₹0.5 lakh, before any additional order-specific costs.
Incorrect
Net incremental benefit = contribution from special order − foregone contribution = ₹2 lakh − ₹1.5 lakh = ₹0.5 lakh, before any additional order-specific costs.
Unattempted
Net incremental benefit = contribution from special order − foregone contribution = ₹2 lakh − ₹1.5 lakh = ₹0.5 lakh, before any additional order-specific costs.
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Question 13 of 20
13. Question
Product X yields contribution ₹90 and uses 6 labour hours. Product Y yields ₹64 and uses 4 labour hours. Which has the higher contribution per labour hour?
Correct
X: ₹90/6 = ₹15 per hour. Y: ₹64/4 = ₹16 per hour. Product Y is preferable under the labour-hour constraint, assuming other factors are equal.
Incorrect
X: ₹90/6 = ₹15 per hour. Y: ₹64/4 = ₹16 per hour. Product Y is preferable under the labour-hour constraint, assuming other factors are equal.
Unattempted
X: ₹90/6 = ₹15 per hour. Y: ₹64/4 = ₹16 per hour. Product Y is preferable under the labour-hour constraint, assuming other factors are equal.
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Question 14 of 20
14. Question
A product requires many small purchase orders but little machine time. ABC may assign it more purchasing overhead because:
Correct
ABC allocates overhead using activity drivers. A product that triggers many purchase orders can consume more procurement resources even if it uses relatively few machine hours.
Incorrect
ABC allocates overhead using activity drivers. A product that triggers many purchase orders can consume more procurement resources even if it uses relatively few machine hours.
Unattempted
ABC allocates overhead using activity drivers. A product that triggers many purchase orders can consume more procurement resources even if it uses relatively few machine hours.
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Question 15 of 20
15. Question
A proposal meets the target margin only if the company omits a legally required safety inspection. The manager should:
Correct
Legal compliance and safety obligations are constraints, not optional costs to omit from the decision. The project should be revised or rejected if it cannot be carried out responsibly.
Incorrect
Legal compliance and safety obligations are constraints, not optional costs to omit from the decision. The project should be revised or rejected if it cannot be carried out responsibly.
Unattempted
Legal compliance and safety obligations are constraints, not optional costs to omit from the decision. The project should be revised or rejected if it cannot be carried out responsibly.
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Question 16 of 20
16. Question
A special project requires hiring a temporary supervisor solely for the project. The supervisor’s salary is:
Correct
Although fixed in relation to units produced, the salary is incurred because of the project and therefore is incremental and relevant to the decision.
Incorrect
Although fixed in relation to units produced, the salary is incurred because of the project and therefore is incremental and relevant to the decision.
Unattempted
Although fixed in relation to units produced, the salary is incurred because of the project and therefore is incremental and relevant to the decision.
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Question 17 of 20
17. Question
Actual sales are ₹60 lakh and break-even sales are ₹45 lakh. Margin of safety ratio is:
Correct
Margin of safety = ₹15 lakh. Margin of safety ratio = ₹15 lakh ÷ ₹60 lakh = 25%.
Incorrect
Margin of safety = ₹15 lakh. Margin of safety ratio = ₹15 lakh ÷ ₹60 lakh = 25%.
Unattempted
Margin of safety = ₹15 lakh. Margin of safety ratio = ₹15 lakh ÷ ₹60 lakh = 25%.
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Question 18 of 20
18. Question
If selling price decreases while unit variable cost and fixed cost remain unchanged, the break-even volume will generally:
Correct
A lower selling price reduces contribution per unit. Since break-even volume equals fixed costs divided by contribution per unit, more units are needed to cover fixed costs.
Incorrect
A lower selling price reduces contribution per unit. Since break-even volume equals fixed costs divided by contribution per unit, more units are needed to cover fixed costs.
Unattempted
A lower selling price reduces contribution per unit. Since break-even volume equals fixed costs divided by contribution per unit, more units are needed to cover fixed costs.
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Question 19 of 20
19. Question
A company expands capacity by installing costly automated equipment funded partly by debt. Which combination may rise?
Correct
Automation may raise fixed operating costs, increasing operating leverage, while debt adds fixed interest charges, increasing financial leverage. Combined risk may therefore rise.
Incorrect
Automation may raise fixed operating costs, increasing operating leverage, while debt adds fixed interest charges, increasing financial leverage. Combined risk may therefore rise.
Unattempted
Automation may raise fixed operating costs, increasing operating leverage, while debt adds fixed interest charges, increasing financial leverage. Combined risk may therefore rise.
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Question 20 of 20
20. Question
Why should managers not select a financing plan solely because it maximises forecast EPS at one EBIT level?
Correct
EBIT-EPS analysis is useful but incomplete. It does not fully reflect financial distress risk, cost of capital, cash-flow uncertainty, control effects or market valuation.
Incorrect
EBIT-EPS analysis is useful but incomplete. It does not fully reflect financial distress risk, cost of capital, cash-flow uncertainty, control effects or market valuation.
Unattempted
EBIT-EPS analysis is useful but incomplete. It does not fully reflect financial distress risk, cost of capital, cash-flow uncertainty, control effects or market valuation.